The Three-Fund Portfolio — It’s all we ever need in the stock market.
U.S. Stocks — International Stocks — U.S. Bonds.
Done.
The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
Three simple, super low-cost Index ETFs are all most of us ever need in the market—why haven’t you heard of this? Read on.
**This is the same Three-Fund portfolio featured in the i401(k) guide here. Haven’t started an i401(k)? It’s freakin’ magic.
TL;DR
The Three-Fund Portfolio uses three Index ETFs — The Vanguard versions:
- U.S. Stock Market Fund (VTI)
- International Stocks (VXUS)
- U.S. Bonds (BND)The jokers on Wall Street and market pundits never mention how easy it is to invest over your lifetime using just these three well-respected ETFs. Why? There is no money in simplicity for them.
Returns will vary year to year, but the portfolio has historically delivered 7-9% average annual growth over 20-30 years.
If you invest $1,150/month for 25 years, growing at 8%, you will make around $1,000,000. That’s the compounding effect of interest and the market’s long-term upward trend. You just need TIME.
Investing 10% of your gross income is a great start. Don’t delay; start now with whatever you can.
This is not magic; it’s a well-known, common-sense portfolio that millions of investors use.
You can use it inside any retirement account, such as an i401(k), Backdoor Roth IRA, HSA, or a taxable brokerage account.
Three ETFs too much? Buy a single Target Date Fund and let it do the mix.
It’s super easy. Get on with your life. Focus on your friends and family. Watch your Three-Fund Portfolio grow in the background.
The Three-Fund Portfolio is a well-known investment strategy that has been around for decades.
I know. All this time, you have been told you must take risks or somehow pick the next Amazon to make money in the market.
Wall Street and parts of the financial industry try to tell us we need to pay some overpriced investment advisor to make the big bucks.
Except they won’t.
SP Global’s long-running study shows that as of July 2025, 90% of active fund managers do not beat the S&P 500 index after 15 years. They will underperform our low-cost index ETFs while charging you, the investor, potentially $100,000s in fees over your investing lifetime.
Meanwhile, Robin Hood has gamified investing, encouraging you to trade like a maniac. Why? They make money when you trade, called ‘payment for order flow’.
None of the players on Wall Street (who refer to us retail investors as the ‘dumb money’ by the way) and some financial advisors (A CFP is different) will tell you how easy it is to invest in the stock market and watch your wealth grow.
There is no money in simplicity for them.
Savvy investors around the world use the Three-Fund Portfolio. But it needs needs TIME to work.
Invest $1,150 per month for 25 years, growing at 8%:
You will have $1 million+
It’s a load of money, and it’s not rocket science.
The Magic of Compounding Interest
Time invested is the key here. Compound interest is money that makes money, which in turn makes more money – it's like having a financial snowball that gets bigger as it rolls downhill.
The percentage gain you make every year gets multiplied again the next year, plus the money you contribute.
8% of $10,000 invested is a gain of $800. Early on in your journey, it’s pretty pedestrian. Later in life, if you have $1 million in your retirement accounts (which is very doable), the 8% yearly gain is $80,000. Boo-Yah!
Play around with the compound interest calculator here. Watch what happens as you change the amount invested per month and the time invested. Use an 8% rate for the ‘estimated interest rate.’
Albert Einstein (turns out he was an investor, just like you.):
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
There is a but; It’s called volatility
Isn’t there always?
The market can bounce around like an insane ping-pong ball, dropping 15% in one year and then rising 20% the next.
We are all unsettled when the market crashes. The secret is to tune out the noise, ignore the panic, and continue investing. Read The Knowledge post here on what the Stock Market really is.
The arrows on the chart are the 2008-09 subprime mortgage crash and the 2020 Covid crash. Scary at the time, but not a big deal over the long term.
A crash is just a blip in our 20 to 30-year investment lifetime.
If you’re under 55 years old, it’s likely to be a buying opportunity. Have a read of this post about how our caveman brains can fool us.
Volatility is not the same as Risk. Risk is the chance you'll lose money permanently, while volatility is your investment having mood swings – going up and down dramatically but potentially ending up fine in the long run.
WTF is an ETF?
An ETF (Exchange-Traded Fund) behaves like a share you buy on the stock exchange, except it holds thousands of companies or bonds within it.
It’s very safe. We are buying thousands of companies or bonds inside each ETF. If one company goes bad, we will hardly notice.
Buying individual companies IS risky. WeWork was the hottest thing, but it ended up filing for bankruptcy in 2023. Search for ‘Worldcom’ and ‘Enron’ to see examples of huge companies that imploded. Investors lost nearly everything.
How does the ETF get created?
When you buy ETF shares, the provider creates more shares of the ETF and then buys more of the companies or bonds that go inside the ETF.*
What’s an Index ETF?
An index is a list of companies created by a financial organization on a stock market exchange. The S&P 500 comprises the 500 U.S. companies chosen by rating agency Standard & Poor's. Another is the Nasdaq 100, which contains the top 100 technology companies listed on the Nasdaq stock exchange.
Index ETFs/funds charge very low fees as they don’t employ over-priced Wall Street analysts trying to pick winners.
*This is a simple explanation. The actual mechanism is a little more complicated.
The ETFs
We use three Index ETFs (Exchange Traded Funds) from Schwab or Vanguard (there are other providers). Millions of investors and retirement funds use these ETFs.
Buy one set of ETFs, either Schwab or Vanguard.
Schwab versions:
SCHB - Total U.S. Stock Market (the top 2,500 companies)
SCHF - International Stocks (1,500 companies)
SCHZ - U.S. Bonds (9,800 bonds)
OR
The Vanguard versions:
VTI - Vanguard Total Stock Market (the top 3,600 companies)
VXUS - Vanguard Total International (8,000 companies)
BND - Vanguard Total Bond Market (11,000 bonds)
The Schwab and Vanguard versions have almost identical returns and their fees are about the same.
Want an even simpler investment path? — The Target Date Fund
You buy one fund, contribute money every month, and hold it until you retire.
A Target Date Fund takes the Three-Fund Portfolio concept and adjusts the mix for you as you approach retirement. The older you get, the more bonds the fund holds. Why? More below.
If you’re 35 and want to retire at in 25 years at age 60, buy the Target Date 2050 fund (VFIFX).
Vanguard is a fantastic company and offers some excellent target-date funds. They keep their fees as low as possible and care about us, the small investor. If you choose to go this way, start an i401(k) with ETrade, as there is no fee to buy the funds. Schwab charges $75 per buy. Vanguard no longer offers an i401(k). For a Backdoor Roth IRA, consider opening one with E*Trade or directly with Vanguard.
Have a look at the Vanguard Target Date Funds here.
Spend 20 minutes a quarter buying our three ETFs or a Target Date Fund. It’s that easy. $1 million+ is waiting for you.
Wise, ye olde proverb:
The best time to plant a tree was twenty years ago. The next best time is today.
U.S. Stocks — International Stocks — U.S. Bonds
Why these three sectors?
Diversification:
Our eggs are in different baskets. The aim here is to deliver a consistently good outcome, neither the best nor the worst. That’s why we have the three ETFs. The portfolio is diversified by including various sectors (tech, utilities, aerospace, pharmaceuticals, etc.) and multiple countries. That helps reduce the volatility. If the U.S. market is having a bad few years, hopefully, International Stocks and Bonds are not.
Low Cost:
The three-fund portfolio uses low-cost index exchange-traded funds (ETFs) or mutual funds. This minimizes investment costs and maximizes how much we make. Our costs are only 0.03 to 0.08% of what we have invested. Example: For $100,000 invested, the cost is $30 - $80 per year. Compare that to the 1-2% an advisor might charge you, which is $1,000 - $2,000/ year. Yeah, no thanks, buddy. (Getting a plan from a CFP 3-5 years before retirement is advisable.)
Simplicity:
Managing a three-fund portfolio is straightforward: You work your day job and have fun with your friends and family while the portfolio works in the background.
You don’t have to stress about what stocks to buy and how they are doing. Our funds match the stock market’s performance. That takes the stress out of trying to figure out which companies will be winners or losers.
Resist messing around with your investment strategy: Investors who look at their portfolio the least and make the fewest changes outperform those who constantly change things and try to outguess the market.
Mr. Wall Street. No thanks, brah, we don't need to pay your fees.
Berkshire Hathaway Investment Manager, Lou Simpson:
“The more decisions you make, the higher the chances are that you will make a poor decision.”
Why Stocks and Bonds: The Odd Couple
Why do we mix stocks and bonds? Stocks offer higher returns, around 10-11% annually, over the long term, but they are more volatile. Bonds return around 4% on average by paying you interest and are the less volatile tortoise of the two. We use that interest to buy more of the bond ETF. I love you, compound interest!
Historically, bonds have performed well when stocks are underperforming, giving you some diversification and smoothing out the dips. This is why it’s recommended to hold more bonds closer to, and in retirement. More below.
How do you split your money up between the three ETFs?
We combine the three ETFs based on how close we are to retirement and how much volatility we can handle compared to the gains they will yield.
Put your foot on the gas with stocks when you’re younger, going for the maximum return. If the market crashes, awesome, everything is on sale. Buy more!
If you’re closer to retirement, consider tapping the brakes and switching to more bonds. You will need to start drawing on the money soon to use as income. If the market crashes, a retiree may not be able to wait five years for it to recover.
When you are three to five years away from retirement, I suggest chatting with an ‘advice only’ Certified Financial Planner - CFP. You pay a one-time fee for them to create a plan for you.
Remember, if this sounds like too much, contribute to a single Target Date Fund every quarter until you retire.
Suggested Three-Fund mixes
The aggressive, high-growth mix
U.S. Stocks: 65%
International Stocks: 25%
Bonds: 10%
Portfolio return: Long-term average 7-9% per year.
Many investors under age 55 go for this. It’s a mix with a high return (make the most money), but will be the most volatile. If you’re not nearing retirement, a market crash is a buying opportunity, not a reason to panic. This is often missed when emotions take over.
The stock market can drop and sometimes take 2-8 years to recover. This is okay if you are not near retirement, as you don’t need to withdraw any money. The ETFs/funds have time to recover. The bonus is we will continue to buy our ETFs at discounted prices.
ME: At 52 years old, this is my mix. My annualized return has been closer to 10% since I started my i401(k) in 2015.
A moderate volatility/growth mix:
All U.S. Market: 45%
International: 15%
Bond: 40%
Portfolio return: Long-term average around 7% per year.
This is a moderate version and is often suggested for those nearing retirement. The classic 60/40 stocks-to-bonds portfolio is often recommended as a ‘sensible portfolio.’ It will be less volatile, but it will have a slightly lower return as you have more money in bonds. For some younger investors, this may be too conservative.
A Three-Fund experimental mix:
All U.S. Market: 70%
International: 18%
Bond: 10%
Individual stocks: 2%
Portfolio return: Long-term average 7-9% per year.
This aggressive mix adds an allocation for buying individual stocks like Apple, Ford, or whatever company you are passionate about.
Take it easy on individual stocks. Many investors suggest keeping them a really small part of your portfolio, at around 2%. Almost no one can outperform an Index ETF. I know it’s fun to buy them, but it can end in tears.
Example time:
Invest $5,000 in a 65/25/10 mix
SCHB — U.S. Broad Market: $3,250 (The math: $5,000 x 0.65)
SCHF — International $1,250 (The math: $5,000 x 0.25)
SCHZ — U.S. Bonds $500 (The math: $5,000 x 0.1)
Struggle with the math? Don’t worry, I suck at math, but I’m still a good investor.
How often do you buy?
Dollar-cost averaging: SCHB in 2023. Buying every quarter gets an average price for the year. We hit the dips and peaks of the market.
Most common is to invest every three months, that’s every quarter. This means we are ‘dollar-cost averaging,’ catching some of the market's ups and downs during the year. If you want to, you can invest monthly, that’s fine. Just keep investing in a set timetable throughout the year.
Jan 1 — April 1 — July 1 — Oct. 1 (also known by the Wall Street crowd as Q1, Q2, Q3, Q4).
Buying on a set timetable takes our emotions out of the equation. If the market has just crashed 30% (March 2020 during Covid, anyone?), you won’t want to buy. Using set buy dates, you short-circuit that emotion. Keep buying every quarter, no matter what!
Read the post about investor psychology here. Don’t trust your emotions. The primitive side of your brain tells you to run (or, in this case, sell) in the face of danger. We need to ignore our emotions and Hold Fast.
Legendary investor Peter Lynch:
“The real key to making money in stocks is not to get scared out of them.”
Don't sell, keep buying. Ignore the herd running for the exit when the market drops. Stay invested and keep buying at the lower prices.
Rebalancing
Sometimes, you need to re-balance the Three-Fund Portfolio to keep your target allocation. Say if International has outperformed its percentage allocation (perhaps you want International to be 20% of the portfolio, but now it’s 23%). You sell 3% and then use the money to buy US Stocks and Bonds to get the portfolio to the correct mix. This is normal. Here is a nifty calculator to help.
Rebalance once a year, don’t stress if you’re out a few percentage points. Perhaps make it a New Year’s resolution that you’ll keep? Eh?
If you use a single Target Date Fund, the fund will automatically do this in the background.
Why can’t I go 100% and pick all my stocks?
Read the Knowledge post here to understand why this ends up as a stressful shitshow. It’s the dark side and leads to pain and suffering. Wall Street wants you to trade as they make money when you do.
Messing up picking a portfolio of individual stocks (at some point you will) means you’ll be stressed and poorer. Your spouse and dog will leave you. Remember, 90% of Wall Street active fund managers do WORSE than the index after 15 years—the chance of you beating them and the market average ain’t great.
What accounts can you use a Three-Fund Portfolio in?
This is the great part. You can use the Three-Fund Portfolio in any brokerage-based account. That’s your i401(k), Backdoor Roth IRA, HSA, even a 529 for college savings, or your old employer’s 401(k) if you have one.
The non-retirement brokerage account.
Don’t forget the taxable brokerage account with a broker like Schwab. That’s a regular stock and ETF non-retirement trading account. If you hold a stock or ETF for more than one year, you only pay the Capital Gains Tax rate of 15% instead of your personal tax rate, which is probably around 25-30%.
See why the rich pay less tax than we working schmos? We can play the game too.
A Target Date Fund is not suitable for a taxable brokerage account, as it can create capital gain events when you don’t expect them.
Wrapping it all up
The end result is a simple, effective way to invest long-term with less stress. You don’t need to pay attention to what one company is doing because you own thousands.
Buy the three ETFs every three months (that’s every quarter).
Keep buying no matter what the market is doing, going up or crashing. Don’t let your emotions take over. Buying during a crash rocks. You are getting the ETFs on sale.
Once a year, rebalance your portfolio.
Consider moving more money into the bond ETF as you get closer to retirement. Three to five years out, get a plan from a good Certified Financial Planner.
Now what?
Use the Three-Fund portfolio in your i401(k). Haven’t started one? It’s the supercharged tax deduction monster; invest and deduct up to $77,500 per year. It’s just for freelancers and single-person businesses (and your spouse). Read about it here.
If your income is mostly W-2, not 1099 open a Roth IRA.
Links so you can read more about the Three-Fund Portfolio. Smarter people than me came up with it:
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.forbes.com/advisor/retirement/3-fund-portfolio
https://www.investopedia.com/3-fund-portfolio-401k-5409269